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03 - Accounting & Taxes Accounting Help & Tax Strategies

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  #1  
Old 03-11-2008, 08:46 PM
rockdocs2
 
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Default Need Guidance for 1120S Correction

In trying to become more involved with tax related issues with our S-Corp, I had noticed some small errors by our "accountant" that I had to correct. Since, I have looked over the yearly filings and would like some guidance on how to correct some things that I feel were done in error:

1) Schedule L-Balance sheet which technically was not needed by the IRS was completed with figures that did not match our records. It appeared that our liabilities did not reflect current loans for both vehicles and equipment, stock reflected an amount less than on our books, and loans from shareholders reflected an amount unknown to me. When I questioned our "accountant", he said that Loans from Shareholders was all of our profit/losses to current, which still did not compute (aside from the other things I mentioned).

2) Schedule M-2 showed zero as a beginning balance each year and only reflected our current year profit/loss. This concerns me because we have been in business for 4 years with profits 3 of the 4 and have never taken a distribution.

I would appreciate any guidance on the best way to resolve the mess he has created.
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  #2  
Old 03-11-2008, 10:15 PM
OldJack
 
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I probably am not telling you anything you don't already know, it appears that you need a qualified accountant. If I understand you correct I have no explanation for such accounting and I am an old accountant. What are your accountant's qualifications, is he licensed?
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  #3  
Old 03-11-2008, 10:28 PM
Evan
 
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Not too sure what the qualifications of your "accountant" is, but he probably knows the system a bit to try to exploit it. At least it seems like he is trying to.

I'm not certain why your accountant did everything he did, but the rationale -- most likely -- for classifying your profits/losses in the "Loans from Shareholders" and not Retained Earnings is that you can "withdraw" from these "loans" you made without a problem. If you have retained earnings and withdraw it (taking a distribution), yet don't take a salary, that's a way to trigger an audit. None the less, what he did was incorrect, and is fraud.

As Jack said, you may need to find a more qualified accountant. If not licensed, at least one with a higher ethical code.
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  #4  
Old 03-12-2008, 07:19 AM
rockdocs2
 
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Bachelors in Accounting-did not sit for the CPA exam-according to him.

I really just want to make all of this right and be able to move forward and sleep well.

1) Do I need to amend 1120S for the last 3 years since schedule L was not required (assets under 250,000)and move this loans from shareholder money into retained earnings and notes payable in more than a year for vehicle and equipment loans? Capital stock was also understated, so I guess this needs corrected as well. Since copies of the forms were also supplied to the states, the corrections are mounting. I assume M-2 will also need corrected, which brings me to question 2...
2) As I understand M-2, it should be a continuing balance carried forward from year to year showing property distributions as necessary (We were never a C Corp and haven't taken any distributions as of yet, but would like to at some point without any issues. I forgot to say that both shareholders do take a reasonable salary on W-2 paying all applicable taxes).

Any recommendations on how to move forward are greatly appreciated.

Thanks for the replies!
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  #5  
Old 03-12-2008, 08:12 AM
OldJack
 
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I strongly suggest that you have a qualified corporate tax pro accountant (CPA?) sit down and work this out with you. Obviously your present accountant knows little about S-corp taxation and corporate tax return preparation. I don't think this is a do it yourself job.
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  #6  
Old 03-12-2008, 04:00 PM
rockdocs2
 
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Thanks for the replies. OldJack, at this time I am somewhat reluctant to trust someone else with my finances, as I hope you can understand. I know what all the numbers are, as I always kept my books anyhow and just gave the info to the "accountant", and I know where the numbers should be. I guess I'm wondering if I can move forward with this years' balance sheet completed correctly, or should I actually ammend the previous 3 years to correct the balance sheet, and open myself up to further scrutiny?
Again, thank you to all who take the time to reply with suggestions and opinions.
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  #7  
Old 03-12-2008, 07:43 PM
OldJack
 
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Well... you paid for what you got from your accountant, I would think your accountant should sit down with you and explain each item on the balance sheet as what it is and how it got there or did not get there as the case may be.
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  #8  
Old 03-15-2008, 09:38 AM
SeattleCPA
 
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Quote:
Originally Posted by rockdocs2 View Post
... Do I need to amend 1120S for the last 3 years since schedule L was not required (assets under 250,000)and move this loans from shareholder money into retained earnings and notes payable in more than a year for vehicle and equipment loans? ...
I wouldn't amend past returns because Schedule L numbers, er, differ. Schedule L, note, shows your balance sheets using your book accounting method (which might not be the same as your tax accounting method and which you could change with IRS permission)...

BTW, I'm not saying these discrepancies are a good sign... only that, well, at this point, you may not want to go and poke the sleeping dog with a stick.

Based on my S corp experiences, I would also wonder if you guys either didn't get or forgot to enter or incorrectly entered some of the accountant's adjusting journal entries... Something to check.

Finally, one really irritating aspect of QuickBooks ( if you're using that ) is the program makes it pretty easy to inadvertently fiddle with the prior year's transactions. That means you basically change the previous year's ending balance sheet. And that, then, means that suddenly QuickBooks and your tax returns don't sync.

Tangential comment: I can't imagine that your accountant wouldn't be happy to discuss these issues with you. Some of this might just be a miscommunication thing...

Good luck.
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  #9  
Old 03-15-2008, 02:28 PM
Joe Trevison
 
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Last years balance Sheet should be on last years return and goes on this year return as the same amount Assets = Liabilties and Capital.

I use to work for the IRS so I know a little about this stuff.
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  #10  
Old 03-15-2008, 06:55 PM
rockdocs2
 
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Seattle CPA, thanks for your insight. Just to let everyone know, I did sit and talk with my accountant about these discrepancies. It was pretty much a head scratching session on his part. When asking him how he arrived at some of the numbers that did not match what I show, his reponse was that he "must have quesstimated". He didn't even file a necessary pass-through-entity return for one of the two states in which we work. I just filed those returns for the PAST THREE YEARS this week, which of course resulted in penalties. He has informed me that I can now pick up my file from his office, which I will not do at this point, as if I am questioned, he will need this detail to provide answers, which I am sure he does not have.

I understand what you're saying about not poking a sleeping dog, however I am not sure of the best way to handle the incorrectly prepared M-2, which may create a discrepancy as to date, we have not yet taken a distribution but would like to in the near future. The accountant was not carrying the ending balance of the year over to the beginning balance of the next year. He always started with a zero balance. It would seem to me that in the eyes of the IRS, the money available for distribution would seem less than it actually is. Could this cause a problem for any future distribution?
FYI, we were never a C corp, always an S corp.
Thanks again for the all the insight and guidance.
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